Gather Little by Little

Photo by: j.anne4( Janne )

The popular thing to do with most people each new year is to set resolutions. I am not a big resolution person as I find setting goals much more effective (JD over at Get Rich Slowly recently wrote an excellent article on this same topic). I considered writing about 2008 goals, but instead thought I would provide you with some ways to kick off your personal finance new year that will have a positive influence on your finances. I would encourage you to turn these into either goals or resolutions, which ever work best for you.

Here are 6 things you can do to kick of your personal finance new year the right way:

1 – Follow a budget

For some reason, creating and following a budget is a simple thing to do, yet very few people seem to do it. I recommend creating a zero based budget on a month to month basis. A zero-based budget is where every dollar of your income gets spent via an expense category in the budget. In other words, each incoming dollar is assigned a home. The end result is that your expected income minus your expenses is $0. Do this for each month, creating a unique budget for each month. Too many people try to create one budget that covers all months. That is just too complicated and seldom works.

The most simple way to do a budget is on a basic sheet of paper. Other options include using a spreadsheet, or even better, budgeting software like You Need A Budget or Mvelopes Personal 3.5. I would suggest starting on paper at first and getting used to the concept of budgeting, then moving to am more automated solution to make it even easier. Personally, I’ve been using a spreadsheet for the last year but will begin using You Need A Budget this month.

In order to make a budget successful you have to track your expenses. It makes no sense to create a budget if you don’t track your spending against it. This is easily done by either writing down all of your expenses or by relying on your bank’s online banking features (which is what I do). I recommend updating your expenses daily so it only takes a few minutes.

For more information on budgeting read these:

• How To Get Your Finances Under Control – Step 4 Create a Budget AND Follow It!
• A Guideline Budget – How Do You Compare?
• How to Save Money by Increasing Your Expenses
• Old Habits Sure Do Die Hard

2 – Do your finances together

If you are married, I strongly advise that you do your finances together as a couple. Develop your budget together and track your spending together. I also recommend that couples have weekly budget meeting. This is where they review their spending and track it against the budget. If adjustments are needed, they determine what to do together and adjust the budget. This keeps both spouses involved and makes them feel as if they have ownership in the process.

Chances are, only one of you is going to be the detailed person (or what I call the “geek”). I’m the geek in my marriage and I develop the initial budget, do all of the tracking and then my wife and I review it together and agree on it.

You can read more on how my wife and I both manage our finances together by reading these articles:

• How to Get My Wife or Husband to Follow a Budget
• How to have a successful budget meeting with your spouse

3 – Establish a base emergency fund

In order for a budget to work and to keep you from relying on your credit cards, an emergency fund is required. Financial experts generally recommend having 3-6 months worth of your salary in an emergency fund. While I agree, this is a significant amount of money and will take most people a while to save up. If you are in debt (i.e. you owe balances on borrowed money other than your house) you should start with a base emergency fund, something around $1,000. Mine is actually a little higher, fluctuating between $1,500 and 2,000 due to the fact I have 6 children. Regardless, $1,000 is a good starting point.

When you go overbudget either due to planned or unplanned expenses instead of reaching for the credit card, pull from your emergency fund instead. Good examples include: unexpected car or house problems, unplanned medical expenses, unplanned travel, etc. I started with a $1,000 emergency fund last year and haven’t needed my credit cards since.

4 – Have credit cards with outstanding balances? Get rid of them

I’ve been burned far too many times by credit card companies and frankly by my reliance on them. Early last year, my wife and I decided to become credit card free. We shredded our credit cards and have never regretted it once.

If you have credit cards with outstanding balances cut up your credit cards now. If shredding is too boring for you, read through my list of 10 creative ways to cut up your credit cards…just be careful! Seriously, we as a society have become far too dependent on credit cards to both carry us through tough times and/or to avoid having to patiently wait to get something we want. We are a”I want it now society“.

If you carry a balance and can’t payoff your balance each month, you don’t need a credit card. Cut it up, use cash or your debit card and stop throwing your money away by giving it to the already rich credit card companies.

You can read more about my views on credit cards by reading these articles:

• Thank God for Credit Cards!
• Chase doesn’t really love me they just act like it
• Credit is a disease you won’t catch here
• The End of Cash?
• How Do You Know You’re in Debt?
• Why Debit Cards Are Better Than Credit Cards
• One of the Many Reasons I hate Credit Cards – Thanks for nothing Chase

5 – Create a debt snowball and start snowflaking

This step is all about attacking your debt…with a vengeance. A debt snowball in a nutshell is basically listing all of your outstanding debts (except for your mortgage) in either interest rate order (greatest to least) or in balance due (least to greatest order). Except for the first item, you pay all minimums. For the first item, you pay as much as you can.

For example, I pay minimums on two of my credit cards and our car loan. The first item on my snowball is our Chase card. I pay $1,000 a month on our against our Chase card which thanks to the debt snowball will be gone by the end of January. The snowball concept comes into play once you’ve paid off that first item. You then take the payment you were making and add the minimum of the next payment and begin paying that amount on the next in line. You are basically snowballing the payment amount as you pay off each debt.

I also use a technique that I learned from I’ve Paid for this twice already called snowflaking. Snowflaking is basically taking whatever spare money you have (or receive) and paying it against your debt. I often make 5-10 payments a month on my Chase card.

You can read more about debt snowballs and snowflaking by reading:

• How To Get Your Finances Under Control – Step 6 Get Out of Debt
• Make Payments on Your Debt Whenever You Can
• Finding and Killing Nemo along with my Debt Snowball
• Key Steps You Can Take Now To Get Out of Debt

6 – Frugal up

This is all about the golden rule of personal finance: Live on less than you earn

Before I started this blog I always thought being frugal met being cheap or even being a miser. After first starting this blog, I realized I wanted to be frugal, but wasn’t sure what it was or what it met exactly. What frugality really means, at least to me, is using your money as efficiently as you can. It means getting the most out of each dollar, and actively pursuing opportunities that allow you to do that.

I’ve also learned that being frugal is fun and rewarding. Take a hard look at your budget and really begin to look at where your money goes. I guarantee you can find areas where you are just wasting money. Even better, write down every dollar you spend for 30 days in a notebook. At the end of the 30-days, review it. Trust me, you’ll be shocked at how much you spend and where you spend it. Use this as further feedback into your budget.

Where can you learn to be more frugal? Well, read this blog or better yet subscribe. I provide money saving tips each Monday to help you be more frugal. I would also highly recommend reading Being Frugal, a friend and fellow M-Network blogger. You can also browse my blog roll for a number of other frugal blogs that will give you tons of ideas.

Here are some links to other frugal articles I’ve written:

• Money Saving Monday Tip Roundup
• 5 Personal Finance Lessons From The Pursuit of Happyness
• My Yard is a Waste of Time and Money
• 6 Financial Decisions – Don’t Learn The Hard Way
• A Night At The County Fair – Memories are priceless

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I am personally doing all of above and have been doing these practices for over a year now. I can’t make any guarantees they will work for you, but they have worked for me and I am confident they will for you as well. Not sure? Just pick one and try it, you will see a difference. No matter how much (or how little) you make each month, these practices apply.

It’s a new year, time for changes, resolutions and maybe even time for a new beginning. Forgot those mistakes of the past, and start anew. Get control of your finances instead of allowing your finances to control you. You can do it!

If you plan to put any of these practices in place, please let me know by commenting below. Studies show that 90% of commitments made in public or in writing are actually completed. Are you already doing some or all of these and they are working for you? Please share your story to encourage others.